BUY NOW, PAY LATER
In the past few years, the BNPLindustry has been one of the fastest growing industries in India. It has achieved a growth rate of 567% in 2020 and 673% in 2021, says a survey.
Buy Now, Pay Later is a payment option wherein one can make a purchase without having to pay from own pocket, the BNPL company will make the payment on behalf of the purchaser. However, you have to repay the amount in a stipulated period, either via lumpsum amount or through EMIs.
HOW DOES BNPL WORK?
As per the World Bank (2017-18), only 3% of the total population holds credit cards in India, it is assumed that this will be currently around 5–6%. This is where BNPL companies come in place. Since these companies do not have a pre-paid instrument license from RBI, they tie up with banks such as SBM bank, RBL bank, etc., holding a license. By doing so, these companies will now pay for your purchases and give you the option to repay in a lump sum amount or split the bill into parts. They boost the likelihood of sales, affordability, and the opportunity for companies to sell high-ticket products by offering such a facility.
HOW DO THESE COMPANIES MAKE MONEY?
BNPL profits from both the buyer as well as the seller. In the case of the buyer, they don't charge anything as long as the amount is paid back on time. On the other hand, if the payment isn't made on time they add interest to the amount depending on the customer's credit and the duration of repayment. Moreover, late fees are assessed on failure to pay the due amount on time. In the case of the seller, the commission paid to the service provider ranges from 2% to 8% of the customers’ purchase price.
DARK SIDE OF BNPL
The negative side of BNPL is rarely discussed. Even though the BNPL benefits both consumers and merchants, the drawbacks must be taken into account. Firstly, it is mostly issued to people who do not have a credit card or cannot hold one i.e., the income of such individuals would be less than 20,000 per month. Secondly, it leads to an increase in the order value of a customer, the customer is more likely to purchase items beyond his means. The American company AFFIRM asserts that its services boost order value by 85%. As a result, it forces people into a debt trap due to careless usage. This has been observed in the foreign market; for instance, 15% of BNPL users in Australia had to take out a loan to pay for their purchases.
RBI AND BNPL
The RBI made an announcement that disallows non-bank prepaid payment instrument issuers from loading credit lines.
By partnering with banks like SBM, RBL bank, and others to issue cards, it is believed that BNPL companies started to bypass the laws. Moreover, these services encourage the customer to spend more than what they can truly afford, placing them into a debt cycle. These could be the possible reasons why RBI has to prohibit them from offering credit loading into their prepaid instruments.
In order to abide by the regulation and continue doing business, the industry is seeking greater clarification from the RBI on what is permitted and what is not.
About the author
Divyam Singhal is a second year student at Kirori Mal College, University of Delhi pursuing B.com(Hons). This is his first blog and he likes to broaden his knowledge on finance related topics. Often he sleeps while reading books.
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